Understanding the companyLevel 2Products10 minUpdated 22 Oct 2026

How does a company make money?

Before you look at a single number, understand where the company's money comes from, how recurring it is and why competitors haven't taken it. This is the foundation of all company analysis.

What you'll learn

Three questions that unlock the business
Why recurring revenue is more valuable than one-off revenue
What the cost structure tells you about flexibility
Where a lasting competitive advantage comes from

Three questions before the numbers

If you can't explain a company's business in a couple of sentences, key figures won't help. Start with these:

What does the company sell? A product, a service, a right of use or brokerage?
To whom? Consumers, businesses or the public sector, and to how many customers?
Why does the customer pay? What problem does it solve, and what would the customer do without this company?

If the answer to the third question is “the customer could easily switch to a competitor, and more cheaply”, that is an important observation, and sooner or later it also shows up in the margins.

Recurring or one-off revenue?

This is one of the most important differences between companies. Recurring revenue renews without a new decision to buy; one-off revenue has to be earned again every time.

Recurring revenue

A subscription, a contract or maintenance.

A software subscription, a lease, a maintenance contract. Revenue is more predictable, and the market typically values this more highly.

One-off revenue

A single sale or project.

A construction project, an equipment sale, campaign sales. It can be very profitable, but the next year starts from zero.

Many companies combine both: a device is sold once, and the related maintenance or consumables bring in recurring revenue. Then it's worth looking at which part the profitability comes from.

The cost structure tells you about flexibility

Fixed costs

Don't flex with sales: premises, administration, development. When sales grow, every extra euro is more profitable. When they fall, earnings collapse quickly.

Variable costs

Grow with sales: raw materials, transport, commissions. Earnings flex downward more gently.

Capital needs

How much money does growth require? An asset-light business grows without large investments.

Chart · illustrative example

Same revenue, different cost structure

Both have revenue of 100 and operating profit of 20. See what happens when sales fall by 10%.

Light fixed cost structure

Revenue: 90
Variable costs: −63
Fixed costs: −10
Operating profit: 17 · −15%

Heavy fixed cost structure

Revenue: 90
Variable costs: −27
Fixed costs: −50
Operating profit: 13 · −35%

A 10% fall in sales cut the first company's operating profit by 15% and the second's by 35%. Fixed costs don't flex with sales. The same leverage works on the way up: in a growing market, the second company grows its earnings clearly faster.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

Profitability attracts competition

The basic mechanism of the economy is simple: if an industry earns exceptional returns, more players enter it. Competition increases supply, pushes prices down and brings profitability back toward the average.

So the key question for an investor is: what stops this from happening to this particular company? That barrier is called a competitive advantage.

The most common sources of competitive advantage

Switching costs

Switching is laborious or risky for the customer: the system is integrated into their processes and their staff are trained to use it.

Network effect

The service gets better as it gains more users. A newcomer finds it hard to compete with an empty network.

Economies of scale

High volume lowers the unit cost so much that a smaller competitor can't match the price profitably.

Brand

The customer pays more for the same product because of trust or image.

Intellectual property

A patent, permit or license prevents direct copying for a fixed period.

Cost structure

A lasting advantage in production, location or access to raw materials.

A practical test: if a competitor had unlimited money, could it copy this within a year? If the answer is yes, the competitive advantage is thin.

The industry sets the framework

A company can be well managed and still poorly profitable if its industry is structurally difficult. The structure of the industry affects how much pricing power companies have.

Strong

The company can pass cost increases on to prices without losing its customers. Margins hold up against inflation.

Weak

The product can be replaced and the customer chooses on price. Cost increases eat directly into the margin.

Check question

Test yourself: the company's business

Four questions.

Kysymys 1 / 4

Why is recurring revenue often valued more highly?

Kysymys 2 / 4

What does a high share of fixed costs mean?

Kysymys 3 / 4

Why does a competitive advantage matter to an investor?

Kysymys 4 / 4

What does pricing power mean?

Score: 0 / 4

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